CAMBRIDGE, Mass. - Not a day goes by that consumers don't read or hear about a vendor announcing an online lending product that promises to process, expedite and deliver a loan application decision faster into consumers' hands than the off-line lending process. So with so much hype about the benefits of online lending and the increased availability of products, why are consumers still wary about originating loans online? A study recently released by Forrester Research may provide some answers. The report authored by Seema Williams described online closing ratios as "abysmal" and concluded that while mortgage lenders are technologically prepared to accept online loan applications and are beginning to focus on online approvals, consumer acceptance still remains years away - online mortgage originations account for less than 1% of total mortgage lending. Among the causes of the problem - the hurdles to automation, like outdated regulatory issues, seem insurmountable to consumers. "A regulatory environment that requires disclosures in print and signatures in person keeps lenders from moving from the entire mortgage process to the Net," wrote Williams. "The demands of institutions that securitize mortgages add yet another layer of complexity that lenders find difficult to automate." Doug Benzine, e-commerce strategy director for CUNA & Affiliates agrees that the regulatory environment is a critical factor, but he adds that "the acceptance of online lending is not totally regulatory driven. It's more the technology-comfort issue that's more important. Credit unions are interested in offering online lending but they're concerned the technology could cannibalize their face-to-face interaction with their members." Benzine offered that credit unions are going through a learning curve about online lending. They're eager to embrace the technology not only because of members' demands but also because it's easy to quantify the technology and show usage and productivity enhancements. But he emphasized that the technology hasn't been fully accepted by credit unions yet because of their lack of understanding of online lending. "Members are way ahead of credit unions when it comes to online lending." Consumers may have more lending choices thanks to automation and in turn demand better service and lower rates from lenders, but the flip side is that the technology is also eliminating the differences between lenders, Williams offers. To survive comoditization and remain competitive, lenders will have to become more creative and unique to stand out from the rest. This may prove to be more of a challenge than a welcome invitation for many lenders. While "lenders' imaginations have been captured by online origination...little about online mortgage lending has changed so far," Williams offers. Lenders' habits might not have changed much, but online lending has shifted the balance of lending power to consumers. Once kept in the dark about mortgage rates, calculation and terms, consumers can now go on the Internet and get advice on things like the different types of loans that are available and which loan to choose. What used to require extensive phone call searches to learn about competitive mortgage rates and terms, now takes little more than a click of a mouse. Moreover, consumers can now receive on-the-spot credit-verified loan approvals online instead of enduring one or two weeks of waiting for that all-important phone call from the lender. Ironically, while Internet technology is pushing the front-end of the mortgage process, the back end remains a manual, paper and people intensive process - a 1998 Microsoft study showed that 43% of the cost of getting a loan from approval to closing was incurred in gathering, ordering, and filing paper. Benzine is not troubled by these stats - it's always easier to automate the front end of an online product offer that allows consumers to do things like fill out forms and request a status report. But the back end typically lags behind. What's the result of this shift? "The Net creates an imbalance in the mortgage business model: lower prices that don't offset processing costs," says Williams. "As prices drop, so do lender margins to a point where loan production becomes unprofitable." Despite consumers' cautiousness about online lending, vendors still expect the online credit market to take off. In another report based on interviews with banks, credit unions and consumer finance companies, Forrester found that lenders have a sense of urgency about their online efforts and that while they understand online lending currently accounts for a small percentage of the total loan market, it's poised to explode. They're so convinced, in fact, that 43% of the 50 lenders Forrester spoke with already offer online credit applications, and another 39% plan to offer them within 12 months. More than 60% indicated they will approve or deny applications online before the end of the year. Benzine estimates credit unions will peak in the online learning curve within the next 18 months. "Members want online lending functionality," he said. "Credit unions know that if they don't get on the curve they risk finding their members going to other financials to get loans. Members are getting more fluent on the Web, other financials' options are just a point and click away. The Net is credit unions' newest competitor for members' loyalties." At press time, Benzine and other CUNA officials were participating in a two-day meeting in Madison to discuss the e-commerce services credit unions should provide in the future. Online lending was one of the items on the list being discussed. -